Ambac Submits CDS Settlement Offer to IRS

Bond insurer Ambac Financial Group Inc. says it has offered to pay the Internal Revenue Service more than $100 million dollars and give up tax credits to settle a dispute over tax treatment of credit default swaps.

The offer is part of the New York-based firm’s Chapter 11 bankruptcy reorganization that will be presented to Judge Shelley C. Chapman in U.S. Bankruptcy Court for the Southern District on New York in Manhattan, scheduled for March 13.

The offer was made after several months of negotiations, Ambac says in a statement. The IRS has not yet accepted the offer, the carrier says.

The terms of the settlement to the IRS laid out by Ambac include:

• A payment by the company’s segregated account of Ambac Assurance Corp. of $100 million.

• A payment by Ambac Financial of $1.9 million.

• Relinquishment by the Ambac Financial consolidated tax group of all loss carry-forwards resulting from the loss of CDS contracts on or before Dec. 31, 2010, to the extent that the loss carry-forwards exceed $3.4 billion.

Ambac says there is no assurance the IRS will accept the offer and the final terms of the agreement could still change.

The agreement still needs court approval.

A spokesman for the IRS says it is prohibited by law from discussing individual tax cases.

Ambac says it filed its plan for reorganization for court approval on Feb. 24, which includes the settlement offer to the IRS.

Any objections to the plan must be filed with the court by 4 p.m. Feb. 29.

Ambac was hurt by losses related to its coverage of sub-prime mortgage CDS during the recent financial meltdown and filed for bankruptcy protection in late 2010. The company split its risky obligations into a separate account that is under the domicile of Wisconsin regulators.

Under the agreement, if finally approved, creditors will end up with a fraction of what they are owed.